Fed’s Bold Move: What the Rate Cut Means for the Economy and the Market | Affinity Capital

September 18, 2024

Today, the Federal Reserve made a significant move by cutting interest rates by 0.50 percentage points, bringing the federal funds rate down to a range of 4.75% to 5%. This decision marks the first rate cut since 2020 and signals a shift in the Fed’s approach as it aims to balance economic growth with inflation control.

Understanding the Fed’s Decision

The Fed’s rate cut is a response to several economic indicators suggesting a slowdown. Despite recent efforts to curb inflation, the labor market has shown signs of weakening, and economic growth has been tepid. By lowering interest rates, the Fed aims to stimulate borrowing and spending, which can help boost economic activity.

Soft Landing

A key term often mentioned in discussions about monetary policy is the “soft landing.” This refers to the Fed’s goal of slowing down the economy just enough to control inflation without triggering a recession. Achieving a soft landing is challenging because it requires precise adjustments to interest rates and other monetary tools. The recent rate cut is part of this delicate balancing act. By easing borrowing costs, the Fed hopes to support economic growth while keeping inflation in check.

Monetary Policy

Monetary policy involves managing the supply of money and interest rates to influence economic activity. The Fed uses tools like interest rate adjustments to achieve its dual mandate of maximum employment and stable prices. The recent rate cut is a clear example of expansionary monetary policy, where the central bank lowers interest rates to encourage borrowing and investment.

Consumer Price Index (CPI)

The Consumer Price Index (CPI) is a critical measure of inflation, tracking changes in the prices of a basket of goods and services over time. Recent data showed that inflation has cooled to 2.5% annually, close to the Fed’s target of 2%. This progress on inflation gave the Fed more confidence to cut rates. However, the central bank remains vigilant, as inflationary pressures can resurface, especially if economic activity picks up too quickly.

Employment

Employment is another crucial factor in the Fed’s decision-making process. The labor market has shown signs of softening, with slower job creation and rising unemployment claims. By cutting rates, the Fed aims to make borrowing cheaper for businesses, encouraging them to invest and hire more workers. This move is intended to support job growth and prevent a significant rise in unemployment.

Impact on Stocks

The stock market often reacts positively to interest rate cuts, as lower borrowing costs can boost corporate profits and economic activity. Here’s how the recent rate cut might affect different sectors:

  1. Technology and Growth Stocks : These stocks tend to benefit the most from lower interest rates. Companies in these sectors often rely on borrowing to finance their growth, and cheaper credit can enhance their profitability and expansion plans.
  2. Financials : Banks and financial institutions might see mixed effects. While lower rates can reduce the interest income they earn from loans, increased economic activity can lead to higher loan demand, potentially offsetting the impact.
  3. Consumer Discretionary : Lower interest rates can boost consumer spending on non-essential goods and services. This sector includes companies in retail, travel, and entertainment, which may see increased demand as borrowing costs decrease.
  4. Real Estate : The real estate sector often benefits from lower interest rates, as cheaper mortgages can stimulate home buying and real estate investments.
  5. Utilities and Defensive Stocks : These stocks are typically less sensitive to interest rate changes. However, they might still see some positive effects as lower rates can reduce their borrowing costs.

Risks and Considerations

While the rate cut aims to support economic growth, there are risks to consider. If the economy overheats, inflation could rise again, forcing the Fed to reverse course and hike rates. Additionally, prolonged low rates can lead to asset bubbles, as investors seek higher returns in riskier assets.

Conclusion

The Fed’s decision to cut interest rates by 0.50 percentage points reflects its commitment to supporting economic growth while keeping inflation in check. By aiming for a soft landing, the central bank hopes to navigate the delicate balance between stimulating the economy and preventing runaway inflation. 

As always, please do not hesitate to reach out to discuss the markets and your portfolios.

 

August 22, 2025
It was a Fed-heavy week, with three major developments that matter for markets and the economy. FOMC minutes (July 29–30) — released Wednesday (Aug. 20). The minutes reinforced a data-dependent stance : participants saw continued progress on inflation but noted that risks aren’t one-way, citing pockets of labor-market cooling and the growth impact of tighter financial conditions. Policymakers emphasized flexibility and the need to see inflation moving durably toward 2% before declaring victory. For investors, the takeaway is that the bar for rapid policy shifts remains high, but the Committee is clearly keeping both sides of the mandate in view. Weekly balance sheet (H.4.1) — released Thursday (Aug. 21). The Fed’s weekly statement showed the usual moving pieces: securities holdings, reserve balances, and program usage. While week-to-week changes can be noisy, the release remains a useful pulse on system liquidity and the runoff of the Fed’s portfolio under quantitative tightening . Markets watch aggregate reserves and Treasury General Account flows because they can nudge front-end rates and funding conditions at the margin. Jackson Hole — Chair Powell’s Friday address. At the Kansas City Fed’s annual symposium, Chair Powell underscored that policy decisions will continue to be guided by incoming data . He highlighted the balance between sustaining expansion and finishing the job on inflation , noting tariff-related price pressures and supply-chain considerations among factors being monitored. The message: no preset path, but openness to adjust as evidence accumulates. Historically, Jackson Hole is more about long-term framework and risk management than near-term moves, and that tone held this year. What it means for the days ahead Near-term market drivers will be how inflation and labor data align with the Fed’s “proceed carefully” posture. • If inflation continues to edge lower while growth holds steady, the door stays open to gradual policy easing later this year. • If price pressures re-accelerate—or if hiring slows more sharply than expected—the Fed may extend its wait-and-see approach. Liquidity dynamics from the Fed’s balance sheet runoff will remain a background factor , but the central story is still inflation’s glide path and the durability of demand . Investors should expect choppy trading around key data releases , with markets pricing probabilities rather than certainties. As always, we welcome your questions and are here to support you . At the heart of everything we do is our commitment to “ Wealth Management for Life ”—providing enduring guidance for you and your family’s financial success.
August 6, 2025
Markets entered the week with a boost of optimism, fueled by softer labor data and growing chatter that the Federal Reserve might be leaning toward a rate cut this fall. But that optimism didn’t last long . As the week unfolded, economic uncertainty returned to center stage: fresh concerns about tariffs, underwhelming corporate earnings in some sectors, and signs of consumer fatigue in key parts of the economy tempered the early enthusiasm.
July 17, 2025
This week’s stock markets were marked by tight trading ranges, record-setting highs in tech, and a backdrop of macro uncertainty. The S&P 500 (through SPY), Nasdaq (QQQ), and Dow (DIA) eked out modest gains, shrugging off headline volatility tied to Fed independence concerns and escalating tariff threats.